In his Budget speech in December 2012, Minister Noonan announced that he would be introducing a series of initiatives to assist small businesses. His reason for focusing on the SME sector was due to the importance of this sector to the Irish economy. A paper published by the Department of Finance in November 2012 highlighted the fact that the SME sector makes up over 99% of businesses in Ireland and accounts for almost 70% of people employed.

To give the SME sector a “helping hand”, the Minister set out a 10 Point Tax Reform Plan which contained measures to assist small business in a number of ways by:

• helping them access funding;
• helping their cash flow position;
• reducing the costs associated with the administrative burden of tax compliance;
• boosting demand for their products in new markets; and
• incentivising them to create jobs.

Finance Act 2013 (FA 2013) contains the specific details on the 10 Point Plan, and the principal measures introduced are set out below. Unless otherwise indicated, the changes introduced are effective for accounting periods ending on or after 1 January 2013.

1. Start-up Relief for Companies

Prior to FA 2013, certain new start-up companies could claim an exemption from corporation tax on trading profits for the first three years of trading, where the annual corporation tax liability is less than €40,000 (marginal relief applies where the liability is between €40,000 and €60,000). In practice however, many companies do not earn sufficient profits in the first three years to get the full benefit of this relief.

FA 2013 has extended this start-up relief by allowing companies to carry forward unused relief for use in subsequent years, where the trading profits in a year are insufficient to utilise the relief.

The relief available in any year will still be restricted by reference to the amount of Employer's PRSI paid for that year.

2. Close Company Surcharge

The amount of undistributed investment and rental income which may be retained by a close company each year, without giving rise to a close company surcharge, has being increased from €635 to €2,000. A similar increase has been made in respect of the surcharge on undistributed trading or professional income of certain service companies.

3. R&D Tax Credit

The R&D tax credit scheme provides for a tax credit of 25% of a company's expenditure on qualifying research and development activities. This tax credit can be offset against the company's corporation tax liability.

The tax credit is calculated on an “incremental basis” by comparing the expenditure in the current year with that incurred in a base year which has been set as 2003 (the accounting year ending in 2003). Expenditure in excess of that incurred in the 2003 base year may qualify for the R&D tax credit.

FA 2013 has amended the existing legislation to provide that the first €200,000 (previously €100,000) of qualifying R&D expenditure will be eligible for the tax credit, regardless of the actual R&D spend in 2003. This change applies for accounting periods commencing on or after 1 January 2013.

A company may surrender all or part of its R&D tax credit, to one or more key employees. The employee could then set this R&D credit against their personal income tax, subject to certain conditions being satisfied. To qualify as a key employee, an individual had to devote at least 75% of their time to R&D activities and at least 75% of their emoluments had to qualify as R&D expenditure. FA 2013 has hopefully widened the application of this tax credit by reducing this 75% threshold to 50%.

4. VAT – Cash Receipts Basis

The annual turnover threshold under which VAT can be accounted for on a cash receipts basis has been increased from €1 million to €1.25 million. This change is effective from 1 May 2013.

5. Foreign Earnings Deduction (FED)

Despite Ireland's reputation as a global economy, 56% of private sector workers are employed by indigenous non-exporting SMEs. In order to encourage SMEs to target new export markets, and to help boost demand for Irish goods and services abroad, FED was re-introduced in 2012.

FED provides an element of tax relief for Irish tax resident employees who travel abroad and try to generate additional export sales to “emerging markets”. Qualifying for the relief meant that a portion of an employee's emoluments (up to a maximum of €35,000 per year) was exempt from income tax. (PRSI and the USC were still payable).

This FED relief was previously only available for Irish tax resident individuals who spent time working in Brazil, Russia, India, China and South Africa (“BRICS” countries”). To qualify for the relief, the individual had to spend at least 60 days in a twelve month period working in one or more of these countries.

For the income tax years 2013 and 2014, FED relief has been extended and now also applies to Irish tax resident individuals who spend sufficient qualifying days working in Algeria, Democratic Republic of Congo, Egypt, Ghana, Kenya, Nigeria, Senegal and Tanzania.

6. Employment & Investment Incentive Scheme (EIIS)

In an attempt to help companies access funding, the EIIS is to be extended from 31 December 2013 to 31 December 2020, subject to EU approval.

Additionally, in what will hopefully be a boost for the tourism industry, the list of qualifying activities is being extended to include operating or managing hotels, guesthouses and self-catering accommodation that fall within the meaning of tourist traffic undertakings. This provision comes into effect for shares issued on or after 1 January 2013.

7. Farming – Stock Relief

The availability of the general 25% stock relief has been extended for a further three years to 31 December 2015, as has the special 100% stock relief available for qualifying young trained farmers.

In addition, the definition of registered farm partnership for the purpose of the 50% stock relief, which formerly only included milk production partnerships, is being extended to include other registered partnerships, such as beef production partnerships. These changes are subject to EU approval.

The amount of stock relief at the 100% rate which can be received by a qualifying farmer, who first qualifies as such in 2012 or a subsequent year, is limited to €40,000 in a single year and €70,000 in aggregate over the course of the scheme (i.e. over the 4 years from 2012 to 2015).

8. Farm Restructuring Relief

A capital gains tax relief is being introduced for farmers, and will apply on certain sales, purchases or exchanges of agricultural land that occur in the period from 1 January 2013 to 31 December 2015. To qualify, Teagasc must certify that the transaction was made for farm restructuring purposes.

Full relief will be available where the land being acquired is of equal or greater value to the land being disposed of. Partial relief will apply where the land acquired is of lesser value.

The relief will be clawed back if the land acquired is subsequently disposed of within five years of the restructuring, except where the land is acquired under a compulsory purchase order.

The commencement of the relief is subject to EU approval.

9. Carried Interest Accruing to Certain Venture Capital Funds

Carried interest is essentially a share of the profits paid to a Venture Capital Fund arising from an investment and is subject to capital gains tax. To encourage venture capital activity, special tax rates of 12.5% and 15% apply to such carried interest that is derived from investments in companies involved in R&D or innovation activities.

FA 2013 makes a number of changes to this relief. Firstly, it extends the relief so that it now applies to investments in established companies as well as start-up companies. Secondly, the relief now applies to the overall performance of the Fund rather than in relation to specific investments. Thirdly, it extends the lower tax rates to individual venture capital fund managers as well as to companies and partnerships. These changes have been introduced with effect to qualifying investments made on or after 1 January 2009.

10. Public Consultation

In his Budget speech, the Minister announced that there would be a public consultation on “Taxation of Micro Enterprises: Reduction in Compliance Costs” to identify possible ways of ease the administrative burden on SMEs. The request for public submissions was made in December 2012 and closed on 28 February 2013. We will have to wait and see what develops from this.

Conclusion

Due to the “fragile state of the public finances”, the individual measures introduced by FA 2013 are relatively modest in and of themselves. Whilst the changes introduced will be seen as positive by the SME sector, in reality they may only provide limited support to the SME sector, and we can only wonder whether bolder and more inventive measures could have been introduced to boost the SME sector and stimulate job creation.

Michael Smith is a Director with FS Taxation Limited, taxation and accounting consultants.

Email: michael@fstax.ie